Protecting wealth

Understanding your Entity Structure

As businesses grow and develop over time so, can the complexity of the business' structure.

With the growth of your business, you may now have a complex web of companies and trusts and possibly even a Self-Managed Super Fund.

It is vitally important that your potential estate consider all of the ramifications of your current entities and that you fully understand the difference between control and ownership.

Many businesses are run through Family Discretionary Trusts for tax purposes, yet we often find that people don't understand who ultimately controls the Trusts, and the impact that this may have on them or their loved ones if they pass away.

Having a Corporate Will that sets out what happens to your business in the event that you pass away is critical to all businesses and is a key trait of successful businesses.

Furthermore, it is vitally important that you have an Exit Strategy and Succession Plan in place. To draw up an exit strategy, business owners need to think through what they would want to happen in the event of their death, disability or retirement.


Jim's Farm

Case Study Background Information

Jim was running his very large farming operations through his Family Trust (which also owned all of the land).

The farm had originally belonged to Jim's parents and the running of the Farm had passed to Jim and his brother Mark when Jim's father passed away 10 years ago. After a few years, Jim bought Mark's share from him, and Mark had moved on.

What we discovered

After we investigated the Family Trust Deed, Jim was horrified to learn that control of the Trust rested with the Appointor (the person who can hire and fire the trustee). While Jim was Trustee of the Trust, Jim's Mother Iris was the Appointor of the Trust. Her Will left everything (including her Appointor role) equally between her two sons, Mark and Jim. This meant that if Iris passed away with the existing documents in place, then Mark could potentially inherit 50% of the control of the Trust back again. Fixing this issue now was fairly straight forward, fixing it in the event that Iris had passed away could potentially be extremely costly and time consuming and would probably end up in the courts.

Mike versus Mary

Case Study Background Information

A number of years ago, I came across a business owner who while running a profitable business was still struggling to pay off his deceased business partner's wife.

What we discovered

I found out that Mike had a handshake agreement with his business partner, Dan, that if either of them passed away, their life insurance would be paid to their wife and the business would go to the surviving business partner. When Dan passed away, his wife Mary was paid the life insurance as she was the beneficiary. Mary then also asked Mike to either accept her as a half owner of the business or pay her out another $600,000 for "her” share. As there was no written Partnership Agreement, Mike had no option but to spend the next 5 years paying off the "debt” he now owed to Mary. This significantly affected him and his family, and could have been avoided by having a planned Exit Strategy and Succession plan and a signed Partnership Agreement.

Assets (Liabilities)
Home $500,000 ($350,000)
Savings $5,000
Vehicles (2) $55,000
Super (Lachlan) $100,000
Super (Sandra) $18,000
Credit Cards ($5,000)
$678,000 ($355,000)

Lachlan’s first thought after hearing the diagnosis was:

Thankfully Lachlan had received advice from Ulton to implement insurance 8 months prior to the diagnosis. He phoned us to let us know and we immediately prepared all of the claim forms. Lachlan’s insurance included the following:

Income Protection Insurance which would pay 75% of his income plus his 9% super contributions after a 4 week waiting period until he is able to go back to work. $170,000 Trauma lump sum payment. Hodgkinsons Lymphoma is an autimatic claim.

The Lump sum payment allowed them to do the following:

  1. $5,000 reduction in credit card
  2. Deposit $165,000 onto their mortgage where the redraw facility will be used as follows:
    1. Around $100,000 over the next 12 months:
      • for upfront payment of medical tests (they have private health insurance but there is still a gap on a lot of the medical costs),
      • Rent on a unit in Brisbane close to the Wesley hospital so that Lachlan can spend time out of the hospital and the family can have some sort of normality when visiting Lachlan
      • Travel costs between Brisbane and Bundaberg
      • Costs of running two households for a period of time.
    2. $42,500 will be used to top up Lachlans’s Income Protection payments over the next two years, to his pre disability salary.
    3. $22,500 buffer for contingencies. Sandra could stop work for 12 months. Alternatively after Lachlan recovers, if these funds are still available then the family will go on a holiday to celebrate Lachlan’s recovery

Having the insurance gave Lachlan peace of mind that the family would not be financially disrupted at a time when they were dealing with the realities of his cancer. It also meant that he could afford to get the best medical treatment and recover properly. He could concentrate on his recovery knowing that the family were financially taken care of.

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Managing the transfer and control of assets with the aim to maximise the benefit to the deceased's estate and beneficiaries.

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